Direct equities may not be the best option for those who are starting out; stick to mutual funds’ systematic investment plans.
When the stock market was touching new highs in January 2018, Mumbai-based Vivek Mistry, 24, got tempted to invest in equities after completing his commerce graduation in 2017. He was keen to learn about investing in equities through experience.
But he didn’t have money to invest in equities. So, in March 2018 he borrowed Rs 1 lakh from his parents and invested in equity markets. That wasn’t his only mistake.
He decided to dabble in derivatives; he bought future contracts of some state-owned banks. But dismal state of state-owned banks (the news of the Punjab National Bank fraud perpetrated by now-fugitive diamantaire Nirav Modi had just been unearthed at the time) and the non-performing asset malaise in banks, in general, didn’t raise enough flags for Mistry who went ahead anyway.
Within two weeks of investing, Mistry lost Rs 50,000 as he decided to wind up his derivative positions. “I made a big blunder from my very first investments by trading in derivatives futures contract and not keeping a stop loss,” said Mistry.
When it comes to dipping fingers in equities, Mistry is not alone. For instance, smallcase.com, an online platform for equity investing, 40 percent of investors are under 27.
A smallcase is an investment instrument; each smallcase is a portfolio of stocks or exchange-traded funds that reflect an idea, theme or strategy. Smallcases platform can be found on brokerages like Zerodha, HDFC Securities, Kotak Securities, Axis Direct, Edelweiss and others.
Nearly 70 percent of stockbroking firm Zerodha’s customers are under 35.
Unfortunately, ease of technology doesn’t restrict youngsters from making crucial investing mistakes.
“Several millennial investors tend to follow the unprofessional approach like investing on random recommendations from friends / colleagues, following ace investors blindly, etc. while investing in equities and tend to register losses due to the short-term and mid-term volatility,” said Hitesh Chotalia, Head of Education at trading and investment institute, FinLearn Academy.
Stop listening to your friends; listen to professionals
One big mistake, experts say, that many commit while investing in equity markets is to listen to their friends, neighbours, uncles, aunts and everyone. Yet, we squirm when it comes to paying a fee for professional advice.
Pune-based Gaurav Kapoor, 25, followed a friend’s advice in October 2018 and invested his hard-earned money in penny stocks (those stocks whose share prices are less than Rs 10). He invested Rs 1.5 lakh after his friend had advised him to buy shares of small-sized companies on the back of expectations of rally in stock prices in this penny stocks.
But, in just two months, the value of Kapoor’s investment went down to Rs 25,000. He had learnt his lesson and later turned to a financial advisor who has now put him on a systematic investment plan of Rs 20,000 in a mid-cap mutual fund scheme.
Mrin Agarwal, financial educator and founder of Finsafe India said: “Most millennials don’t have the capabilities to analyse financials of the company, interpret the news. They often end up buying stocks on tips from friends / colleagues.”
Buy and hold is good, but learn to let go as well
An earlier Moneycontrol – CRISIL Research Ltd study published in January spoke of the merits of patiently staying invested through turbulent times.
The study pointed out that if investors who had invested in January 2007 in rising markets had panicked and redeemed in 2008 after the global market crash that happened on the back of credit crisis and had withdrawn at the end of 2008, investors would have lost 33 percent.
Those who had stayed invested till the end of the year of 2011, would have made a marginal gain of 4 percent. But if you had stayed on till the end of 2017, you would have made 16 percent. The study had considered the 20 largest equity funds at the start of 2007.
But that doesn’t mean you hold on to bad investments. Experts advise that when you buy equity shares directly, it’s better to have a stop-loss instruction in equities with a broker to sell a security after it reaches the price limit you had set.
Nithin Kamath, Founder & CEO of online stock broker, Zerodha said, “Having stop losses as a part of every trade will assist in being a disciplined trader without which some of the most common trading blunders will come to the fore. Stop losses need to be defined on a number of factors such as the maximum loss an investor is willing to take on a position, a risk to reward ratio, market volatility etc.”
Averaging stock price – not fruitful at all times
Often investors average the stock price by accumulating more quantity when the price of a particular stock from portfolio tumbles.
For instance, in 2017 Kinjal Shah, 25, residing in Mumbai decided to accumulate equity shares of Reliance Communications.
She invested on the back of reports that the firm was seeking a buyer for itself since it’s own debt levels were high. Her calculation was that if a suitable company acquires Rcom, the firm’s own share price would go up.
Happily, she started accumulating this stock at a price of Rs 32 per stock. The sale hasn’t yet happened, but in the meanwhile, Rcom’s share price has fallen to Rs 5.06 (as on closing price of 25th March, 2019). She kept on averaging the cost price by continuing with her investment in this stock.
She ended up investing Rs 50,000 and accumulated 1200 quantity of Rcom stocks. Shah says: “When I knew the company was not doing well. I should have not invested into it with certain assumptions or should have a stop loss while investing to reduce losses.”
CA Sameer Shah, CEO at Sameer Shah and Associates from Mumbai advised, “Millennial investor always needs to study the fundamentals of the company from annual reports, quarterly results and take a second opinion from research analysts who track the company before investing and accumulating the fresh quantity of the stocks.”
Mutual funds or direct equities; do SIP
If you don’t have the time or wherewithal to go through a company’s annual reports or cash flow statements, it’s best to stick to mutual funds. Numerous online platforms are available that help investors to invest in mutual funds.
Financial advisors and distributors also offer holistic financial planning to guide the millennials to invest across equities and debt.
Suresh Sadagopan, SEBI registered investment advisor and Founder of Ladder7 Financial Advisories said, “Millennials can commence investment if they are able to understand the schemes or else it’s recommended to take help of the financial advisor to identify goals and invest in a diversified portfolio analysing the risk appetite.”
Avoid the lure of direct plans in mutual fund schemes if you are just starting out. These are plans that facilitate investors to invest in mutual funds without any distributor in the middle.
Hence, direct plans come with a lower expense ratio as distributor fees are not embedded in them. Regular plans have distributor fees embedded in them as they are sold by distributors. But trying to save a bit of cost here and you risk of losing much more if you end up investing in the wrong mutual fund scheme by yourself.
But SEBI registered investment advisors can sell direct plans if you are opt for their fee-based financial plan; a much safer way to invest in equities.
Kamath said, “One of the easiest ways today to get started for millennials is SIP in mutual funds, more specifically index funds. It can be something as simple as a combination of Nifty 50 + Nifty Next 50 index funds.”
Financial experts say that as you gain some experiences and survive at least one market cycle, you can slowly consider part of your overall portfolio investing in direct equities after having exposure in index funds and mutual funds initially.
If I sell equity soon after I buy, I am gambling
A large section of investment population buys stocks in the morning and sells it in a day. This is called day trading and millennials should stay away from it.
Sadagopan said, “An investor in day trading might make money on one day and lose ten times the money on the next day. It’s not to be considered as an investment at all.”
Several millennials prefer taking a position in selected stocks for short term and plan to exit after achieving target price.
Amol Joshi, founder of financial advisory firm Plan Rupee Investment Services said, “It’s important to note that equity is affected by both micro and macro-economic factors. So, many things are not in control of investors while investing for a short period of time.”A better idea is to link your goals with your investments and ask what is that you are saving for.